Making sense of geopolitical risk drivers in the Middle East

Middle East Risk Watch - Issue 9 - March 2018
Making sense of geopolitical risk drivers in the Middle East

In a region where there is rarely a dull moment, the concluding weeks of 2017 seemed set expectations for an even more unpredictable year across the Middle East and North Africa. Making sense of the latest developments across the region – and what they mean for your business – can be a daunting task. To help filter through the noise, Control Risks has identified five key drivers of geopolitical risk to businesses in the Middle East in 2018.

America takes a back seat

Once the undisputed arbiter in the Middle East and North Africa, the US nowadays is often absent, and increasingly viewed in the region as an unreliable political and diplomatic partner. While this trend began under the administration of former President Barack Obama, it has become pronounced under President Donald J Trump. The region will continue to be strategically important for the US in terms of security, counterterrorism and trade. However, Washington will increasingly look for Middle Eastern states to take the lead on political and security issues in the region.

While we expect the Gulf states to pursue an increasingly active foreign policy, Russia and China will also position themselves as alternative power brokers in the region. Beijing will engage in the Middle East primarily to increase and protect its investments and resources of interest. In contrast, Moscow will pursue both economic and political aims (it will be instrumental in efforts to resolve the Syria conflict). The increasing number of strong, external actors across the region will lead to foreign relations becoming more transactional and less predictable.

Growing tensions with Iran

Trump has placed increasing pressure on the Joint Comprehensive Plan of Action (JCPOA), which eased sanctions on Iran in exchange for closer monitoring of its nuclear programme. This pressure will not abate as Iran continues to support designated terrorist organisations and other armed groups across the Middle East.

Although Trump has threatened to withdraw from the JCPOA, we think the deal will hold. European and Asian countries still support the agreement, and Iran will continue to abide by its terms because the economic and security gains remain too great to forego. Nevertheless, Trump’s ultimatum-laden approach to Iran means that additional international sanctions are likely over the coming year.

The JCPOA’s collapse would significantly increase the sanctions risks for foreign investors and companies with operations in Iran and have serious consequences across the region. Iran would be likely to resume clandestine enrichment of uranium, which would increase risk of war. Iranian political hardliners would also exert increasing influence over the country’s foreign policy, thereby increasing the risk of a conflict between Iran and either Saudi Arabia or Israel.

Nuisance neighbours

In late 2017, Lebanon’s prime minister announced his resignation while visiting Saudi Arabia. Following reports that Riyadh had forced him into the decision and that he was being held in the kingdom against his will, he eventually returned home and withdrew his decision to stand down. The saga was not so much an anomaly in Levantine affairs as a harbinger, and the eastern Mediterranean will remain poised for further drama in 2018. Anti-Iran sentiment in the US, Israel and Saudi Arabia – and Washington’s backing for Israel – will result in further interference, by various external actors, in Lebanon’s politics.

Although a resolution to the Syria conflict is far from imminent, its intensity is declining. This will cause the focus of the myriad actors in the conflict, including Lebanese Shia movement Hizbullah, to shift elsewhere. As the group increasingly returns home, tensions between Hizbullah and Israel will be increasingly likely to converge on the weapons factories that the Shia movement is developing in southern Lebanon. Trump’s recognition of Jerusalem as Israel’s capital was symbolic rather than substantive, and will put a two-state solution even farther out of reach. The usually quiet Jordan will also be at risk of greater interference as various external forces – and particularly anti-Iran interests – converge on its neighbours.

Rewriting the rule book

As the global economy gains strength and oil prices slowly recover, sustainable growth in the Gulf Arab states will be contingent on economic diversification and regulatory reform. Governments in the Gulf will attempt to attract companies and people who can provide the knowledge transfers, capacity building and technology required for such a transformation.

To this end, regulations governing inward investment, data protection, labour, local-content requirements, taxation and privatisation are likely to be eased, as states increasingly compete for investment. Although this will create regulatory unpredictability over the next two years, it will lead to fundamental improvements in the countries’ business environments beyond then.

Next in line

The question of who will succeed Algeria’s President Abdelaziz Bouteflika, Iran’s Supreme Leader Ali Khamenei and Oman’s Sultan Qaboos bin Said Al Said – and the impact the successions might have on stability in these countries – will remain a pressing concern. All three leaders are ageing and reportedly in poor health.

The regional rivalry between Iran and Saudi Arabia, the changing role of the US, Russia and China in the region, and the economic pressures on Algeria, Iran and Oman increase the range of potential outcomes for the succession processes. Organisations need to prepare for different scenarios following any number of potential changes of leadership. They will also need to engage with their partners, clients, government officials and other stakeholders to ensure their businesses remain resilient, irrespective of who takes over.

Known unknowns

Post-conflict states and Gulf Arab countries that are under pressure to attract investment in their non-oil economies will present opportunities for companies across a range of sectors. However, foreign relations will be less predictable and driven by an increasingly diverse set of actors from within and beyond the region. The conflicts in Syria, Yemen and Libya will drive insecurity in neighbouring states, and militant groups will remain entrenched across the region. Corruption, bureaucracy and a capricious approach to regulations and their enforcement will also pose persistent challenges to investors across the region over the coming year.

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